Tue 05/03/2022 10:13 AM
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Performing credit Adler Group audited accounts coverage from Reorg's EMEA Core Credit team.

Relevant Documents:
KPMG Statement on Adler
Adler Group Annual Report 2021
Adler Group FY’21 Presentation
Adler Real Estate Annual Report 2021
Adler Group Press Release


German real estate company Adler told investors on a call this morning that all its covenants are intact after the publication of its audited financial accounts. It also said cash balances were verified as part of the audit process and the “cash is definitely there.” Management highlighted that the group’s liquidity requirement is covered until 2023 and more asset disposals are planned, which could lead to net proceeds of €542 million.

Management also said the company is working with KPMG to cure a disclaimer of opinion, issued by the auditor after “the refusal of access to certain information about affiliated companies and persons,” which led to a 10-15 points decline in the group’s bonds this morning after it was published on Saturday. Since the investor call, bonds have recovered somewhat but are still down compared with Friday.

Adler Group’s €500 million bond due 2027 is quoted at 62, down from 65/67 on Friday, while the €800 million bond due 2029 is quoted at 57/60 down from 64/66 on Friday. The €700 million bond due 2026 is quoted at 60/63 down from 68/70 on Friday.

KPMG, BaFin Audit

Adler Chairman Stefan Kirsten stressed that KPMG has not withdrawn from its role as auditor, which would have been the case if it had concluded that there are “effects on the financial statements” that are both “material and pervasive.” In this case a disclaimer of opinion would have not been adequate. Kirsten added that this disclaimer means that there are “possible effects which could be material and pervasive.”

Accordingly, Kirsten said that the financial statements are audited and compliant with Luxembourg law and that the German auditor body has confirmed this view.

KPMG issued a disclaimer of opinion on the financial statements of 2021 and in a separate statement said that the financial statements 2020 of the group should no longer be relied upon. In the same statement KPMG also said it was unable to complete its audit of the annual accounts of the company. Adler’s Kirsten said that it is wrong that the audit was not finished and that the company’s lawyers are clarifying the issue with KPMG.

He went on to clarify that it’s not correct to assume that they withheld 800,000 emails due to attorney client privilege but rather that they could not offer machine sorting on this and it would have delayed the audit to do it manually. The company will now ensure that everything legally possible is made available to auditors. However, he cautioned that some emails cannot be shown for all sorts of reasons including personality rights and data protection rights.

Kirsten said the company is now focused on clearing its name with the auditors, starting with the half-year reports and board member Thilo Schmid will be in dialogue with KPMG on how to cure the reasons for the disclaimer of opinion. Kirsten said the company and management have a professional relationship with the auditor but they are working to rebuild trust and both sides can decide in May whether the company will continue with KPMG as the auditor or not.

Investors also asked if Adler would publish the legal opinion on the audit, to which management replied it would consult with its counsel White & Case about this.

In regard to the ongoing BaFin investigation, Chairman Kirsten said the company will provide the German regulator with more information on Thursday, May 5. He clarified that the investigation at the moment mostly consists of email exchanges about factual questions to the company, which are mostly focused on 2020 year-end. However, BaFin could extend the scope of the investigation or ask for more data, he clarified. Adler Group is supported by PwC in the process of providing the information to BaFin.

In regard to communication with bondholders about potential covenant waivers or new financing, Kirsten said that he will communicate more but that recently management was very restricted due to the special audit.

Board Changes

Regarding the offer of resignation by the board members, Kirsten said he cannot accept all resignations as the company, which has a complex structure, must still be run. As such, Schmid and Thomas Zinnöcker will retain their roles as will Kirsten . Thierry Beaudemoulin will remain as CEO, while the search for a new CFO will start imminently. Additionally, the group is looking for an external compliance officer, who will report to the chief legal officer, he said.

Kirsten said the company made personnel changes that were deemed necessary and that the work of his colleagues was up to standard. However, shareholders will be able to vote on these positions at the next AGM.

Investors also asked about Kisten’s relationship with Cevdet Caner, an Austrian businessman, who the short seller group Viceroy says secretly controls Adler Group despite being just a minority shareholder via his family foundation. Kirsten said he has met Caner on various occasions and worked with him when Vonovia acquired Conwert but that there is no special relationship with him.

KPMG said it can neither verify nor refute the allegations that Caner acted as a decision-maker of the group and carried out several transactions to the detriment of the group and its shareholders, on the basis of the documents submitted.

Liquidity

Regarding liquidity, management said the company had about €700 million cash at the end of April and expects it to rise to about €1.56 billion by year-end, which puts the company in a comfortable position to service its obligations in the remainder of the year.

While Kirsten admitted that capital markets remain closed to the company, management added the group’s liquidity requirements were covered until the end of 2023. Anticipated cash inflow over the next two years covered cash outflows by 1.73x in the base case and 1.17x in the worst case. Despite this, even the group’s shorter-dated notes such as the Adler real estate 2023 bonds have fallen about 4 points and are quoted at about 85 due to the recent concerns around the KPMG investigation report and disclaimer of opinion.

When asked why the group’s €300 million RCF was terminated in April, Kirsten said the RCF was repaid from cash from the LEG transaction and the group does not need the RCF as its liquidity needs are covered. Management said the RCF facility was canceled by Adler.

The group was also asked if the auditor KPMG was able to verify the cash. In response, management said this was done as part of the standard audit procedure. However, management did not disclose how the cash balance was split between the group, Adler Real Estate and Consus. It should be noted that the group did not provide bank accounts of Adler Real Estate as part of the special investigation by KPMG.

The group is prevented from raising additional debt, though it can refinance existing debt, due to its unencumbered asset ratio covenant. Due to a goodwill impairment of €1.1 billion related to Consus, the unencumbered asset ratio stood at 114.5% at the end of the year, instead of the required minimum of 125%. However, the group stressed it has enough liquidity and said cash flow will be tightly monitored.

Kirsten said the group has several options to address the limiting covenants including repaying mortgage loans and buying back the limiting bonds and it expects to increase the unencumbered asset ratio again.

Kirsten said he will not make any announcements about dividends until mid-May. The company is legally able to pay dividends and it has the cash to do so, however, the decision will be an economic one.

On Dec. 29, 2021 Adler Real Estate’s subsidiary Adler AG made a €265.2 million intercompany loan to Adler Group. Adler Real Estate says this loan was signed in March 2022. Management was asked how the loan was made to the group prior to being signed, to which the chairman said he had no idea as he started in mid-February, but added that he would dig into it.

Portfolio

Adler Group is in the process of making more disposals, which should lead to net proceeds of €542 million, management said. The yielding portfolio was €5.6 billion at the end of 2021 due to completed disposals including a sale to LEG Immobilien.

Beaudemoulin said the company made the decision to regain control of assets related to the sale of seven projects to Partners Immobilien due to the outstanding receivables of 60% of the price and will be looking to sell these assets later.

The company also expects LEG Immobilien to exercise the option to buy Adler's remaining 63% stake in property investor BCP before September.

To date, 97% of the asset deals signed with Velero/KKR have been completed while all asset management responsibility has already been transferred. The rest is expected to be completed in the coming months, the company said.

In regard to the impairment at Consus, one investor asked whether Adler Group would consider taking legal action against the vendor and management commented that it will look into it and will brief investors if it intends to do something in this respect.

The group will publish first-quarter results at the end of this month and there will be an update on further measures in mid-May.

The group’s pro forma capital structure is below:














































































































































































































































































































































Adler Group - Pro Forma as of 04/30/2022


12/31/2021

EBITDA Multiple

(EUR in Millions)

Amount

Price

Mkt. Val.

Maturity

Rate

Yield

Book

Market


Adler RE Secured Bank Debt 1

739.3


739.3




Consus Secured Loans 2

434.2


434.2




Total OpCo Secured Debt

1,173.5

1,173.5

5.6x

5.6x

Adler RE BCP - Israeli Shekel-Denom. Amort. Debenture Tranche B due 2024 3

32.0


32.0

Dec-01-2024

3.290%


Adler RE BCP - Israeli Shekel-Denom. Amort. Debenture Tranche C due 2026 3

41.0


41.0

Jul-01-2026

3.300%


Adler RE- €500M SUNs due 2023

500.0

92.6

463.1

Apr-27-2023

1.875%

7.630%

Adler RE - €300M SUNs due 2024

300.0

91.4

274.1

Feb-06-2024

2.125%

6.500%

Adler RE - €300M SUNs due 2026

300.0

91.5

274.4

Apr-27-2026

3.000%

5.220%

Consus - €200M Senior Unsecured Convertible Bond due 2022

120.0

90.5

108.6

Nov-29-2022

4.000%

15.170%

Total OpCo Unsecured Debt

1,293.0

1,193.1

11.8x

11.4x

Adler RE - Leases

6.2


6.2




Total OpCo Leases

6.2

6.2

11.9x

11.4x

Adler Group - Bank Debt and Other Loans 4

1,643.5


1,643.5




Total Adler Group - Secured Debt

1,643.5

1,643.5

19.8x

19.3x

Adler Group - €400M Senior Unsecured Notes due 2024

400.0

88.2

353.0

Jul-26-2024

1.500%

6.470%

Adler Group - €400M Senior Unsecured Notes due 2025

400.0

88.7

355.0

Aug-05-2025

3.250%

6.810%

Adler Group - €700M Unsecured Notes due 2026

700.0

85.4

597.4

Jan-14-2026

1.875%

5.990%

Adler Group- €400M Senior Unsecured Notes due 2026

400.0

86.5

346.0

Nov-13-2026

2.750%

6.050%

Adler Group - New €500M Senior Unsecured Notes due 2027

500.0

84.5

422.5

Apr-27-2027

2.250%

5.660%

Adler Group - €800M Unsecured Notes due 2029

800.0

83.4

667.2

Jan-14-2029

2.250%

5.090%

Adler Group - €165M Senior Unsecured Convertible Bond due 2023

102.0


102.0

Nov-23-2023

2.000%


Total Adler Group Unsecured Notes

3,302.0

2,843.0

35.6x

32.9x

Adler Group Lease Liabilities 5

10.8


10.8




Total Adler Group Leases

10.8

10.8

35.7x

33.0x

Total Debt

7,429.0

6,870.1

35.7x

33.0x

Less: Cash and Equivalents

(700.0)

(700.0)

Net Debt

6,729.0

6,170.1

32.3x

29.6x

Operating Metrics

LTM Revenue

1,143.7

LTM Reported EBITDA

208.2


Liquidity

Plus: Cash and Equivalents

700.0

Total Liquidity

700.0

Credit Metrics

Gross Leverage

35.7x

Net Leverage

32.3x

Notes:
Adler Group IR said that the unsecured bonds of Adler RE, Consus and Adler Group will be pari passu after the denomination agreement. However, IR did not provide any details of timing or content of this agreement. The capital structure is on a post-IFRS 16 basis. Cash position is pro forma for April end. EBITDA refers to the EBITDA total as reported by the company. The group also has €500M commercial paper program which was not added in liquidity, €5 million if it was drawn as of Dec 31,2021.
1. The figure is taken from Adler Real Estate report under financial liabilities to banks, which include liabilities relating to the acquisition and financing of investment properties. This figure rises to €1.342 billion if BCP subgroup is not considered a disposal group.
2. Amount as of March 31 as latest figure is not disclosed. The figure was provided by Adler Group's IR team via an email with Reorg, and pro forma for the €170M project loan repayment in Q3'21.
3. BCP bonds are amortizing in nature. Issued by Brack Capital Properties NV (a subsidiary of Adler Real Estate).
4. Most of the loans were secured with the assets. Calculated as Adler Group's bank debt and other loans of €2.817B less Adler Real Estate bank debt and Consus secured loans. Including an amount of €5M outstanding under the commercial paper program.
5. Adler Group Leases excludes leases at Adler Real Estate level.
Pro Forma: The capital structure is pro forma for April end. April end cash balance of about €700 million is proforma for repayment of the €400 million Adler RE 2022 bond and €687 million proceeds received from sale of assets to KKR. The group's €300 million RCF was also terminated in April.



– Aurelia Seidlhofer, Noor Sehur
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